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27 August 2014

Office Property Market insights 2014

27 August 2014

Limited new office completions in Q2 provide rental support

In Q2, only one office building was completed, namely Menara TH @ Platinum Park located in the Golden Triangle, adding 359,000 sq ft of office space. With this completion, office stock increased to 70.1 million sq ft in Q2 from 69.8 million sq ft in the previous quarter, an increase of 0.5% q-o-q. For the first half of 2014, 632,000 sq ft of office space has been completed, while another 3.4 million sq ft is expected to be completed in the second half of the year. Office projects expected to be completed in H2 include a key project ‘Q’ Sentral at KL Sentral with more than 1.0 million sq ft of office space. Between H2 and 2017, the projected office supply is high with 13.7 million sq ft expected to be completed.

More than 65% of this future supply is estimated to be completed between H2 and 2015, which could downwardly affect occupancy and rents (Figure 6). Marginal increase in rental and capital values Average Average rental values in the prime locations of Kuala Lumpur rose marginally to RM6.15 per sq ft per month in Q2, from RM6.13 per sq ft per month in Q1, after almost six quarters of stability (Figure 7). This increase is attributed to the revision in service charges due to higher operating costs as a result of a rise in utility rates. Rentals of top-tier buildings ranged from approximately RM7 to RM10 per sq ft per month, with average rent also increasing from RM7.76 in Q1 to RM7.82 per sq ft per month at the end of Q2.

A similar trend was noted in average capital values, which increased marginally from RM838 per sq ft in Q1 to RM850 per sq ft in Q2. With negative net absorption of 164,100 sq ft, occupancy declined 1.0 percentage-point to 84% in Q2 (Figure 8). The occupancy level is projected to weaken further with negative net absorption and the large amount of supply which will be completed by the end of this year.

Uncertain market sentiment

Oversupply will continue to be a concern for some time given the significant pipeline supply which is expected to exceed projected demand. Landlords continue to take this opportunity to upgrade and refurbish older buildings to be able to compete with newer buildings for tenants.

Green buildings, with minimal rental premium, are becoming standard offerings amongst the new space completed. Notwithstanding, the supply pressure on rents could be positive for attracting new demand. In short, the comparatively lower rents continue to make Kuala Lumpur an attractive destination for multi-national corporations (MNCs) to set up their regional headquarters.

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